Dongfeng Deal Buys Time And New Blood For Peugeot

PSA Peugeot Citroen (PEUP.PA) and China’s Dongfeng have agreed a 3 billion euro ($4.1 billion) capital tie-up that brings the troubled French carmaker new leadership, more time to turn its business around and an end to two centuries of family control.

Peugeot, Dongfeng Motor Group Co Ltd (0489.HK) and the French government have signed a non-binding outline agreement, China’s second biggest carmaker announced on Wednesday, confirming an earlier Reuters report.

Peugeot Chief Executive Philippe Varin and former Renault executive Carlos Tavares, who will replace Varin when the deal is finalized, must now explain how the fresh capital can be used to improve the bottom line, analysts said.

“Expectations are running high,” London-based ISI Group analyst Erich Hauser said in a note. “PSA (Peugeot) needs to show a new equity story to keep investors interested.”

Under the memorandum of understanding signed on Tuesday, Dongfeng and the French state will each pay about 800 million euros ($1.10 billion) for a 14 percent stake in a reserved share sale and a rights issue, Dongfeng said in a statement published on the Hong Kong stock exchange website.

Existing shareholders will get warrants entitling them to more stock at the same 7.50 euro price as the reserved issue, a 40 percent discount to their market value, raising up to a further billion euros.

The Peugeot family will see its 25.4 percent stake and 38 percent of voting rights diluted to parity with Dongfeng and the French state, ceding control of the company it founded in 1810 as a maker of tools and coffee mills.

The rescue deal and an expected new lending partnership with Banco Santander (SAN.MC) will help Peugeot survive the expiry next year of 7 billion euros in state guarantees keeping its lending arm afloat.

Dongfeng is the latest Chinese carmaker to take a significant stake in a Western peer after Zhejiang Geely Holding GEELY.UL bought Sweden’s Volvo Car in 2010 and SAIC Group acquired South Korea’s SSangyong.

Besides putting some of its 24 billion yuan ($3.96 billion) of cash reserves to work, some analysts have questioned what the Chinese carmaker and its own Fengshen line of vehicles stand to gain from the tie-up.

Under the MOU, Peugeot and Dongfeng’s China joint venture will aim to sell 1.5 million vehicles a year starting 2020. It will also jointly establish a research and development center in China, and consider setting up a new company responsible for the sales in the Asia-Pacific region, especially Southeast Asia.

Industry experts have cast doubt over how much engineering know-how Peugeot will share with Dongfeng given the lengthy negotiations Geely had to undertake to convince Volvo to make technology available even though it owned 100 percent of the Swedish brand.

In the end the European carmaker only parted with platform technology that it had decided to retire. The two companies recently agreed however to jointly develop small-car technology.

Peugeot has limited market penetration in Southeast Asia. Last year it sold about 6,500 cars in Malaysia, its biggest regional market, accounting for just one percent of that country’s car sales, according to research firm LMC Automotive.

Under Peugeot family control, company insiders say the carmaker has been slow to adapt to competitive threats and has missed opportunities to deepen partnerships with BMW (BMWG.DE), Toyota (7203.T) and Mitsubishi Motors (7211.T).

Analysts say Dongfeng’s cash buys time but does not address the European problems behind much of Peugeot’s 3 billion euro cash burn and 5 billion net loss in 2012.

The company needs to scrap another plant and freeze investment to return to profit in the region, Max Warburton of Bernstein Research said on February 14.

While the remedy would be “risky, disruptive and stressful”, Warburton said, “there’s still a chance Peugeot can trade its way out of its current difficulties”.

But the French government, which initially obstructed last year’s closure of the Aulnay factory near Paris, has already warned it is unlikely to accept any more plant cuts in its new role as a major shareholder.

Further closures “are not on the agenda”, Industry Minister Arnaud Montebourg told France Inter radio on Tuesday. “The restructuring has already happened, and it was painful enough.”

Peugeot is expected to meet existing commitments to build at least one new model at each French site and produce 1 million vehicles domestically by 2016, Montebourg said.

Peugeot shares fell 2.2 percent to close at 12.50 euros. Dongfeng shares fell 0.7 percent as of midday Wednesday as they resumed trade after being suspended a day earlier pending announcement of the PSA deal, while the broader market was flat.

The deal, which follows months of talks and remains subject to a Peugeot shareholder vote, is likely to be signed formally during Chinese President Xi Jinping’s visit to Paris in late March, sources say. ($1 = 0.7298 euros) ($1 = 6.0641 Chinese yuan)

(Additional reporting by Jean-Baptiste Vey and Chine Labbé in Paris, Sophie Sassard in London,; Kazunori Takada and Norihiko Shirouzuin in Shanghai; Editing by Louise Ireland and David Evans)